Friday, Aug. 30, 2002 | 9:56 a.m.
PHILADELPHIA -- A gambling empire that has sprung up from a rural eastern Pennsylvania horse race track is about to go Hollywood.
Penn National Gaming Inc. expects to nearly double its revenues with the expected closing of its $780 million purchase of Hollywood Casino Corp. early next year, Chief Executive Peter M. Carlino said.
The deal will mean name changes for the riverboat and on-land casinos Wyomissing-based Penn National already owns in Mississippi, Louisiana and Colorado.
"We will brand all of our casino properties with the Hollywood brand," Carlino said.
And Penn National will get new stature as a national gaming power with a major casino in the lucrative Chicago market.
"With the purchase of Hollywood Casino, they are becoming a major casino operator," said George L. Smith, a gaming industry analyst with Davenport & Co.
"Chicago is one of the major casino markets in the country," Smith said. And after a $70 million expansion of the Hollywood Casino in Aurora, Ill., he said, "That is one of the best properties in the market."
Carlino, 55, chairman, CEO and owner of more than 21 percent of Penn National's stock, started at the company in 1972, when it was named Mountainview Thoroughbred Racing Association and consisted solely of the racetrack his father started in 1972 at Grantville, 15 miles northeast of Harrisburg.
"Its genesis was a very small rural racetrack in central Pennsylvania," Carlino said. And the company had to look beyond Grantville to survive as customers began bypassing the track to look for greater gaming excitement.
"Over the last five or six years, horse racing has been in a downturn, largely because of the growth of the casino business in Atlantic City, and racetracks supported by slot machines in Delaware and West Virginia," Carlino said.
But by turning from racing to a focus on gaming, Penn National has done more than survive, making Fortune magazine's 100 Fastest Growing Companies list last year with a ranking of 58th, then jumping into a tie for 12th on the latest list.
The company began expanding close to home by building off-track betting facilities. Pennsylvania law allows six per track, and the company acquired the Pocono Downs harness-racing track near Wilkes-Barre so it could build centers under that track's allotment as well. In addition to the two tracks it now owns 11 off-track betting facilities in Pennsylvania.
Off-track betting helped revenues, but the first key to big growth was the "racino" race track and casino concept the company turned to after its initial public offering of stock in 1994 raised money for further expansion outside the state.
Penn National acquired its current flagship property, Charles Town Raceway in Charles Town, W.Va., when West Virginia hadn't yet legalized slot machines. The track was failing. "We lost $2 million in our first year," Carlino said.
West Virginia legalized slot machines at race tracks a year later, and, Smith said, "The Charles Town property has just boomed."
The Western-themed casino -- with its bright lights in the northeastern tip of West Virginia just an hour's drive from Baltimore and less than 90 minutes from Washington, D.C. -- has expanded from an initial 400 slot machines to more than 2,500.
Revenues from the track and casino have shot up from $16.5 million in 1997 to $194 million last year. "They've been met with very strong demand," Smith said.
While expanding Charles Town Raceway, Penn National was also using its new revenues to finance other acquisitions. And though still a major revenue producer, the "racino" has taken a back seat to the casino in the company's business.
"They made a concerted effort to shift away from the parimutuel business -- the horse-racing business -- into the casino business," said David W. Anders, an analyst for Merrill Lynch. "Some unique opportunities have been presented to the company and they have had the good sense to pursue them."
Penn National first bought the Casino Magic hotel, casino, golf course and marina at Bay St. Louis, Miss., and the Boomtown Biloxi casino in Biloxi, Miss. Then it acquired the Casino Rouge riverboat gambling facility in Baton Rouge, La.
In April, it completed the purchase of the Bullwhackers Casino, Bullpen Sports Casino and Silver Hawk Saloon and Casino in Black Hawk, Colo.
In August, Penn National announced the agreement to purchase Hollywood Casinos. In addition to the dockside casino at Aurora, Ill., 35 miles west of Chicago, the purchase adds a casino and 505-room hotel in Tunica County, Miss., 30 miles south of Memphis, Tenn., and a dockside casino and 403-room hotel in Shreveport, La.
Horse racing accounted for less than 20 percent of Penn National's revenues last year, dropped to less than 10 percent this year and will be less than 5 percent after the Hollywood Casino acquisition. "You've got to go where the growth is," Carlino said.
Penn National isn't approaching top Las Vegas casino companies like Park Place Entertainment Corp., owner of Caesars Palace, Bally's Las Vegas and scores of casinos around the world, with 55,000 employees and $4.6 billion in annual sales, or MGM MIRAGE, with 42,000 employees and more than $4 billion in annual sales.
But even in a faltering economy, the company has grown fast enough to make the Fortune Fastest Growing list, from 370 employees and sales of $38 million a year when it went public in 1994 to 10,000 employees and $520 million in annual sales now.
Carlino said the number of employees will jump to 15,000 with the Hollywood Casino acquisition, and the company said the acquisition will almost double revenues to more than $1 billion a year, making it the nation's seventh-largest public gaming company.
Smith said Penn National would move into the top 10 casino companies.
"Even in a recession, people give up personal entertainment last. They want to have a good time and they are reluctant to give that up," Carlino said. He said he had no qualms about people spending their money at the track or casino when times are hard.
"I assure you they are not there because they somehow think they are going to walk out with a fortune," Carlino said. "The majority of the people are moms and dads, husbands and wives. They will set a sensible budget that they are willing to spend, and they want to have a good night."
Though fantasy is an element of the entertainment that casinos sell, Carlino said, "The business plan is a real one."
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